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Catalyst Housing Limited (202110773)

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REPORT

COMPLAINT 202110773

Catalyst Housing Limited

14 November 2022

 

Our approach

The Housing Ombudsman’s approach to investigating and determining complaints is to decide what is fair in all the circumstances of the case. This is set out in the Housing Act 1996 and the Housing Ombudsman Scheme (the Scheme). The Ombudsman considers the evidence and looks to see if there has been any ‘maladministration’, for example whether the landlord has failed to keep to the law, followed proper procedure, followed good practice or behaved in a reasonable and competent manner.

Both the resident and the landlord have submitted information to the Ombudsman and this has been carefully considered. Their accounts of what has happened are summarised below. This report is not an exhaustive description of all the events that have occurred in relation to this case, but an outline of the key issues as a background to the investigation’s findings.

The complaint

  1. This complaint is about:
    1. The landlord’s response to the resident’s concerns about its management of a sinking fund;
    2. The landlord’s complaint handling.

Background and summary of events

Background

  1. The resident and his wife have been shared-owners of the property since March 2016. The original lease began around 2003. The property is a semi-detached bungalow in a retirement complex (the development) containing around 29 homes and some communal areas. The resident is the chair of a residents’ association, but he brought an individual complaint to the Ombudsman.
  2. The landlord provided the development’s master lease document. Though not specific to the resident, the document is a template containing the development’s standard lease terms. It shows leaseholders are obliged to contribute towards the landlord’s costs, broadly maintenance, management and repairs, through annual service charges, which are calculated in accordance with the terms.
  3. The relevant calculation terms (Part I of the Schedule) show the landlord is responsible for, “The creation or enlargement of such reserves or sinking funds against future liabilities and expenses in connection with the landlord’s obligations in this Schedule as the landlord may deem prudent and desirable.”
  4. Complaints about the level of a rent or service charge increase fall outside the Ombudsman’s jurisdiction. The First Tier Tribunal (Property Chamber) can establish whether variable service charges are reasonable or payable. This includes sinking fund contributions. The Ombudsman can consider the landlord’s communication in relation to the charges, including its response to the resident’s concerns.
  5. The landlord operates a two-stage complaints procedure. It provided a complaints policy document dated 11 January 2021. The Ombudsman was unable to find a more relevant policy document online, so the following assessment was based on the landlord’s document. The document shows the landlord aimed to respond to all complaints within ten working days at both stages of the procedure.

Summary of events

  1. The landlord’s internal correspondence from 13 October 2020 shows it was due to meet the development’s leaseholders over the next two weeks. The email’s attachments suggest the development’s sinking fund would be a key topic for discussion during the meetings. The email said the meetings were expected to lead to complaints from residents.
  2. The resident emailed the landlord on 2 November 2020. He said the development’s residents had discussed the situation and they wanted to raise a group complaint about its sinking fund. The email shows the resident was expecting a further update from the landlord. He said the complaint may ultimately be withdrawn if the residents were happy with its decision. The Ombudsman has not seen a copy of the landlord’s response to this email.
  3. On 9 November 2020 the resident completed the landlord’s online complaint form. A document with multiple signatures was attached to the form. The resident said the complaint represented the signatories, who were “extremely unhappy” with the landlord’s proposals around the sinking fund. This was on the basis the proposals would double the residents’ contributions, and additional lump sums would still be payable in future. His main points were:
    1. The sinking fund was too small because the landlord mismanaged it for 29 years before the resident moved in. It was therefore unfair to significantly increase the residents’ payments because the payment levels should have been correct from the start. The situation was disappointing because all residents paid the landlord an annual management fee of around £450.
    2. The landlord needed £130,000 in 2027 to carry out works to the development. However, “serious mismanagement” had occurred since the fund’s projected value was only £47,000. Further, the landlord had always known the works would be required, and it was responsible for setting the residents’ annual contribution figure.
    3. The proposed contribution increases and projected lump sums were unaffordable for most residents. Further, residents should not be penalised because the landlord previously set their contributions incorrectly. Given the circumstances, the landlord should meet the projected shortfall (of around £83,000) in the sinking fund.
  4. The landlord issued a stage one response on 25 November 2020. This was 12 working days after the resident submitted his online complaint. The response was written by the landlord’s service charge leader. The resident’s complaint was not upheld. This was broadly on the basis the landlord’s approach to the sinking fund was reasonable. The main points were:
    1. During meetings with residents in October 2020, the landlord discussed its anticipated works to the development over the next 30 years. The scope of these works was based on a detailed survey undertaken by its Asset Team. The landlord’s proposals also took into account the average lifecycle of various building assets (such as roofing and windows).
    2. Contribution levels were set during annual resident meetings. Historically, contributions had not increased significantly due to the tension between the landlord’s expenses, and the amount residents were willing to pay. Nevertheless, the proposals were based on a realistic assessment of the required works, and the costs were staggered over more than 30 years. The current sinking fund, with contribution levels maintained, covered all costs until 2027.
    3. Following engagement with residents, the landlord had concluded its “reserve funds” needed to increase. In future, a potential shortfall in the sinking fund was possible. However, the landlord’s proposals would help to ensure any increases were staggered for affordability reasons. The landlord would review it costings at regular intervals, engage with residents and make adjustments where necessary. It would also offer repayment agreements in respect of any shortfalls.
  5. On 4 December 2020 the resident escalated the complaint by email. He said it was shocking and unprofessional that the landlord had attempted to blame residents for its own “malpractice”. He also said the landlord’s stage one response was “bland” and it failed to engage with his complaint points. The resident reiterated that the landlord should contribute to the sinking fund to ensure there were no short falls. His main points were:
    1. Sinking funds were supposed to ensure that all residents contributed to the cost of major works, and that costs were spread to avoid significant one-off bills. On that basis, it was unfair to increase the residents’ contribution when the landlord previously set the overall contribution rates too low.
    2. The landlord should explain why it had diverged from best practice in its approach to the sinking fund. For example, any tension between its costs and residents’ willingness to pay did not override the landlord’s responsibility to set appropriate contribution levels.
    3. Residents were waiting for the final details of the sinking fund and a spreadsheet showing all the shortfalls. The landlord should confirm when it would update them. Younger residents were unhappy that the landlord’s costs were only covered until 2027 given this was a comparatively short timeframe.
  6. The landlord’s internal correspondence from 18 December 2020 shows it had failed to progress the resident’s escalation request correctly due to an internal allocation error. The correspondence said the resident should be issued an urgent acknowledgement, which confirmed the landlord would respond to the complaint in January 2021. This was ten working days after the resident’s escalation request.
  7. The landlord updated the resident by email the same day. It said it was currently reviewing the reserve funds and associated works, along with costs and timelines for delivering the works. Further, a surveyor had been scheduled to inspect the development in early January 2021 to support the landlord’s review. The landlord said it would review the reserve fund calculations accordingly once it had all the required information. The email was broadly consistent with the landlord’s internal correspondence.
  8. On 2 March 2021 the landlord issued the resident its revised sinking fund projections by email. This was around eleven weeks after its previous correspondence. No information was seen to show the landlord updated the resident during the interim period. The landlord said the updated schedule reflected a reduction of around £42,000 in fascia, soffit and guttering costs. Further, roof replacement works had been postponed by five years. Overall, it said, the new schedule would improve the sinking fund’s position if the proposed increases to the annual contribution were achieved.
  9. On 8 March 2021 the resident emailed the landlord a list of questions about its revised projections. He said he still wanted to progress his mismanagement complaint because the figures showed a 10% increase in the sinking fund was needed during the current year, and 15% was needed for the next ten years. His main points were:
    1. The landlord’s figures were “way above” inflation and they represented an almost five-fold increase in the next ten years. In addition, residents would still be liable for significant lump sums in the future and the estimates were based on current prices.
    2. The landlord’s costings for works to communal areas, including a kitchen, guest room and WC’s, were “exorbitant”. The proposed works were also unnecessary because the facilities in these areas were in a reasonable condition.
    3. The landlord should show due consideration for its elderly residents on fixed incomes. Further, the residents should be able to determine when works to the communal areas were needed.
  10. On 19 March 2021 the landlord responded to the resident’s complaint at stage two. This was around 37 weeks after his escalation request. The landlord said the resident had previously asked to delay the final response until after he received its revised projections. The resident has not disputed this version of events. The resident’s complaint was not upheld. The response did not contain referral rights to the Ombudsman. It addressed the resident’s list of questions in turn. The main points were:
    1. The increases were necessary to ensure the sinking fund could support like-for-like replacement works. It would take ten years before annual contributions were at the correct level to sustain the estimated costs of each asset relative to its expected lifespan. Without the increases the fund would be permanently in deficit. The landlord’s proposal was phased over a number of years with a view to improving the fund’s position whilst balancing affordability concerns.
    2. The alternatives were either a sharp rise in annual contributions, or a more gradual increase that would likely lead to shortfalls in future years. Future shortfalls could be addressed by increasing contributions during the early years of the plan. However, residents were resistant to this proposal during the meetings in October 2020. Alternatively, contribution levels could be reviewed in future following the completion of some early stage works.
    3. All costings were estimates and there would always be uncertainty when projecting works more than 15 years in advance. The revised figures reflected residents’ affordability concerns and the landlord’s own view on the affordability of increased contributions and/or shortfalls in the fund. As a result, the landlord had settled on a ten year time horizon. Given the difficulty of planning many years in advance, its projections would be reviewed on an ongoing basis.
    4. The landlord had decided to replace parts of the communal areas following consultation with residents. For example, the communal room’s carpet and kitchen were “near the end of their useful life” and it was good management to replace them before they failed. Again, the current costings were estimates and the items would be fully costed before being replaced. In relation to communal flooring, calculations were based on the likely cost of replacement rather than the income of residents. An allowance needed to be made for VAT and fees.
  11. In May 2021 the landlord responded in detail to an enquiry from the resident’s local MP, who was acting on the resident’s behalf. The response set out the landlord’s approach to planning/projections and described some of the challenges involved from the landlord’s perspective. It also addressed the resident’s assertion that the sinking fund had been mismanaged. It restated a number of points the landlord made during its final response in March 2021. The key points were:
    1. The sinking fund was kept under review. The impact of reviews was often greater prior to a peak in expenditure. Some works could be postponed to soften peaks but this was not always possible. Further, “smoothing” costs in this way could lead to artificially low projections. The landlord would not defer works that could adversely impact the condition of its residents’ homes. Where possible, it grouped works to minimise disruption and achieve efficiency savings. It was unable to guarantee that costs would not exceed the value of the sinking fund.
    2. The resident’s observations around the 10 and 15 percent increases was correct. Phased increases the in sinking fund contributions over the next ten years represented an increase of 376% on 2020/21 contribution levels. Sinking fund contributions were only one aspect of residents’ total service charges. Taking the projected increase into account, the overall increase in service charges would be 24% over the ten year period. This amounted to an increase of around 2.2% per year.
    3. Predicted shortfalls the resident highlighted were projected to occur in the years 2037/38, 2040/41 and 2057/58. Given they were a minimum of 15 years away, the projections were likely to change and would be kept under review. For example, the model predicted roofing would need replacing in 2056/57. It may turn out that these works could be phased over several years, but the landlord was currently unable to predict this eventuality.
    4. Residents were not being penalised for mismanagement of the sinking fund. The development’s lease agreements allowed for “the creation of… such reserves or sinking funds against future liabilities and expenses… as the landlord may deem prudent and desirable”. The landlord was working to minimise shortfalls by increasing contributions and scheduling works where possible. Nevertheless, it had a responsibility to complete essential works regardless of the sinking fund’s position.
    5. The landlord would work with residents in relation to any shortfalls. Depending on the value of the charges to be recovered, this could include repayment plans spanning several years. Because he had previously completed the landlord’s complaints procedure, the resident should refer to the Ombudsman if he was still unhappy.
  12. The resident completed the Ombudsman’s online complaint form on 11 August 2021. This was around five months after the landlord issued its final response. He said, despite a massive proposed increase in their monthly contributions, residents would still be liable for lump sums in future due to the landlord’s mismanagement of the sinking fund. Further, the situation was unfair to residents that moved to the development comparatively recently. He also said, despite some minor adjustments, the landlord’s revised figures remained broadly the same.
  13. Following a request for clarification from the Ombudsman, the landlord reissued its final response on 10 December 2021. The Ombudsman asked the landlord to clarify whether the resident’s complaint had completed its internal complaints procedure. The landlord’s reissued document included the correct referral rights to the Ombudsman. Otherwise, there were no significant changes to the wording of the landlord’s response.

Assessment and findings

The landlord’s response to the resident’s concerns about its management of a sinking fund

  1. The resident’s concerns about increased sinking fund contributions and possible future shortfalls are understandable. However, it may help to explain that, unlike a court, the Ombudsman is unable to establish liability. We are therefore unable to determine whether the landlord mismanaged the development’s sinking fund. Nor can we order it to cover any shortfalls in the fund. The resident could seek legal advice if he wants to pursue these concerns. Alternatively, the First Tier Tribunal (Property Chamber) can consider whether the increased contributions are reasonable or payable.
  2. That said, the Ombudsman can consider whether the landlord complied with its obligations under the lease agreement. The master lease document shows it is for the landlord, based on the landlord’s calculation of what is prudent and desirable given its other obligations, to determine the position of the development’s sinking fund. However, no information was seen to show the landlord was obliged to ensure the sinking fund was sufficient to cover its exact repair costs.
  3. Given the above, shortfalls or one-off charges to residents do not necessarily evidence a failure by the landlord to manage the sinking fund correctly. In summary, the evidence suggests the sinking fund is intended to soften the financial impact of major works on residents. It is not intended to ensure the costs of major works are covered in full. As a result, it cannot be fairly said that the landlord’s response was either contrary to the lease agreement or unreasonable.
  4. Overall, the evidence suggests the landlord engaged appropriately with the resident’s concerns during the timeline. For example, following a review around January 2021, it identified significant savings could be achieved by reducing the scope of proposed roofing/guttering works. It also responded to the resident’s concerns in detail on a number of occasions. In addition, it sought to reassure him that repayment agreements were an option in the event of any shortfalls.
  5. For the reasons explained above, the Ombudsman was unable to consider every aspect of the resident’s complaint. However, in relation to the aspects we could assess, this Service was unable to point to any failures by the landlord in respect of this complaint point. As a result, there was no maladministration on the landlord’s part.

The landlord’s complaint handling

  1. The timeline points to a number of issues with the landlord’s complaint handling. Primarily, its stage two response was issued without the correct Ombudsman referral rights in the first instance. The evidence suggests this delayed the resident’s approach to the Ombudsman by around five months between 19 March and 11 August 2021. The MP’s enquiry during the interim period confirms the resident remained dissatisfied and he was looking to progress his concerns outside of the landlord’s complaints process.
  2. It is reasonable to conclude this avoidable delay was a source of frustration for the resident. Further, that the error would cause a corresponding delay at the Housing Ombudsman Service because the resident joined our queue late. The landlord should have therefore attempted to redress the resident for its error when it re-issued its final response. If necessary, it could have contacted the resident to establish the impact of the delay.
  3. It was also noted, despite the wording of his escalation request, no information was seen to show the resident was kept updated about the landlord’s review progress between18 December 2020 and 2 March 2021.From the wording of the landlord’s stage two acknowledgment, it would be reasonable to infer that the review would be completed in January 2021.
  4. Nevertheless, the evidence suggests the resident was next updated around eleven weeks later when the landlord issued its revised projections. It was also noted the landlord’s stage one response was delayed by around two working days. These issues were not significant failures in themselves. This is largely due to the wording of the landlord’s stage two acknowledgement.
  5. Given the above identified delays and failures there was maladministration in respect of the landlord’s complaint handling. The Ombudsman will therefore order proportionate compensation to put things right for the resident given the information seen.

Determination (decision)

  1. In accordance with paragraph 52 of the Housing Ombudsman Scheme, there was:
    1. No maladministration in respect of the landlord’s response to the resident’s concerns about its management of a sinking fund.
    2. Maladministration in respect of the landlord’s complaint handling.

Reasons

  1. With regards to the sinking fund, the Ombudsman was unable to point to any failures by the landlord. The master lease document shows it is for the landlord to determine the fund’s position based on its calculation of what is prudent and desirable. No information was seen to show it was obliged to ensure the fund was sufficient to cover its exact repair costs. Overall, the landlord engaged appropriately with the resident’s concerns.
  2. The evidence shows points to a number of issues with the landlord’s complaint handling. Primarily, the resident’s approach to the Ombudsman was delayed by around five months because the landlord failed to include the correct referral rights in its final response letter. Though it subsequently re-issued its final response, the landlord made no attempt to redress the resident for its error.

Orders and recommendations

Orders

  1. The Ombudsman orders the landlord to pay the resident £125 in compensation within four weeks. This is to address any distress and inconvenience the resident was caused by the above identified delays and failures in respect of the landlord’s complaint handling.
  2. The landlord to share this report’s key findings with relevant staff within four weeks. Staff should be aware that formal complaint responses need to include the correct Ombudsman referral rights. Further, where errors are identified any resulting impacts need to be considered and addressed.

Recommendations

  1. The landlord’s complaint response template letters to include Ombudsman referral rights.
  2. The landlord’s complaint responses to include any relevant lease agreement wording where applicable. In this case the provisions concerning the sinking fund were relevant.
  3. The landlord should provide evidence of compliance with the above orders and confirm its intentions with regards to the recommendations within four weeks.